On The Brink with Castle Island - Weekly Roundup 07/15/22 (Celsius files Chapter 11, 3AC not cooperating, Circle clarifies USDC reserves) (EP.334)

Episode Date: July 15, 2022

Matt and Nic return for another week of news and deals. In this episode:  Stablecoin actives outpace blue chip crypto Why is Tether on Tron so popular? Is H E Justin Sun willing to deploy $5b in acquisitions Celsius files for Chapter 11 bankruptcy protection KeyFi is suing Celsius Are DeFi business models going to have to change? Where do tokenholders fall in the capital stack? Three Arrows are not cooperating with liquidation 3AC liquidators reportedly fail to exercise the Starkware token warrant Blockchain.com report a loss from 3AC New lenders admit losses from 3AC Circle further clarifies their reserve assets Was Taibbi's USDC FUD legit? Sponsor notes: Subscribe to the Coin Metrics State of the Network newsletter

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of Concentuteeasing. You print a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something called a Bitcoin. Welcome to On the Brink. I'm Matt Walsh.

And I'm Nick Carter. And this episode is brought to you by Coin Metrics. And here is the Metrics Minute. All right. Let's check the chain with the Coin Metrics Metrics Minute. In the last year, there were twice as many Bitcoin active addresses as daily wallets. Now they decompose these two statistics, addresses and wallets. Ethereum monthly active addresses have dropped to around 6 million, the lowest since June 2020. Stablecoin active addresses, by contrast, hit a new all-time high in May 22, reaching over

750K. USDC daily actives surged in May 22, reaching their highest level in a year. So contrasts between the blue chip crypto assets and the stablecoin sector, which is white hot. That's your coin metrics metrics minute. Speaking of coin metrics, I was looking at this chart that someone posted on Twitter this week, which was looking at USDT active addresses over a 30-day rolling average. And if you plot that and you look at Tether on Tron versus Tether on Ethereum, Tether on Tron active addresses is, you know, five times as much at least. It's just incredible.

Yeah, it's wild. I mean, probably the single most use consumer product in crypto is tether on Tron. It always shocks people when they hear it. And I guess it's because it doesn't really matter around the subtle assurances if you're talking about something with an off-chain value, right? So it doesn't really matter. And I guess it's just because the fees are lower on Tron, where the fees on Ethereum are substantial.

And so you just pick the lowest fee if you're moving a stable coin, right? I mean, look, if you're a merchant importing Chinese goods into Nigeria and you want to settle in dollars, you probably just don't really care that much about whether it's difficult or not to run a Tron node or, you know, how reliable tether is or the quality of tether's reserves, you probably don't spend any time thinking about it. You're just thinking to yourself, it's really neat that I can use dollars where I never had access to them before. and all my counterparties and my whole supply chain uses dollars, this is great. That's probably where you're thinking to yourself.

Do you see Justin Sun said he's ready to do $5 billion worth of acquisitions? That's his excellency, Justin's son to you. Yeah, his excellency is just pounding his chest. He's going to do $5 billion. Why don't we, let's see it, Justin. Yeah, no, I'm ready. What shocks me is that Binance definitely has the dry powder to do stuff here. And they've not been active.

Yeah, Binance hasn't been active. CZ was on a podcast saying that he's been looking at things. I do wonder with Binance, though, if, you know, coming into like the United States might be difficult for them in a lot of ways, particularly around beneficial ownership and some of the regulated venues. So not shocking to me that they're not active in the U.S. market. I think Justin Sun might have the same problem. I mean, you're not going to see Justin's son go get a bit license.

I can tell you that. He did purchase the BitTorrent IP back in the day. He did. Which was, I believe that was there as a corporate entity there. Yeah, oh yeah, there was, yeah, based in San Francisco, I believe. And he did, and he turned it into a token. He'll take everything that was pure in Web 1.0, turn it into a token. Yeah, so we'll see what Justin comes up with.

I mean, it is incredible because, you know, imagine a year ago, you're thinking to yourself, okay, which of our sort of beloved crypto royalty will survive the next bear market and which will perish in the bear market? And the answer you'd have given would probably not have been, Justin's son will be thriving while some of our treasured characters are on the run. Well, if you had told me that Celsius was going to go bankrupt, I probably would have believed you. And so I guess we'll get into that at some point. That actually was on my bingo card a few times. Celsius is going to have to disappear in order for us to really get to a new all-time high.

All right. So let's hop into some deals of the week. First one up, the guys over at multi-coin capital. They have raised $430 million for their third crypto venture fund. Congrats to Kyle and Tushar. Also in fund announcements, Lightspeed raised over $7 billion in total new funding. And they announced the formation of Lightspeed faction, which is their independent blockchain investment unit.

Next one up is safe. This is formerly known as NOSIS safe. This is a provider of multi-sig wallets and number of other digital asset management solutions. They've raised $100 million. It was from 1KX, Tiger, Lightspeed, and DCG. NOSIS is a good example of a pivot that has worked out really well. NOSIS was a prediction market back in the day.

And it is much broader than that right now. Yeah, yeah, far more than that. and certainly the most trusted multisig provider in the Ethereum space. Kind of incredible. I mean, in five years time, probably few people will know that they started out as a prediction market. Just funny to see the different trajectories between NOSIS and Auger. Auger kind of tried to stay true to the original objective and NOSIS pivoted into a bunch of other things. Was NOSIS the one that had just terribly botched ICSIA?

that it was over in like five minutes and they only sold like 5% of the float or something? Yeah, the design wasn't good. So yeah, there was a 95% yeah, only 5% was sold. So yeah, I think it was a weird early experiment with Dutch auctions and yeah, had a weirdly low float. I guess it's also in the category of businesses that did ICOs

that have gone back to doing venture around. So not a lot of those. So good to see NOSS continuing to push forward here. Next one up is Anna Moka. This is the NFT and Metaverse Gaming Studio. They have raised $75 million. It was at a $5.9 billion valuation. They were raised from Liberty City, 10T, Kingsway, and others.

Definitely rounds getting done these days. Next up we have copper. The digital assets custody firm, this is more of a rumor. They are rumored to be nearing the close of a Series C at a $2 billion valuation. Next one is Li-Fi, a cross-chain infrastructure protocol. They raised $5.5.5 million from Dragonfly, Lattice, Scalar, Sixth Man, and Coinbase. Then we've got Quadrata.

They... Oops. Then we've got protagonists. They raised $100 million for a first-time fund that will look into early-stage crypto businesses. Next one is Quadrata, a provider of decentralized identity solutions. they raised 7.5 million from Dragonfly. Then we've got Mistin Labs.

They're a developer of a blockchain called Suey, S-U-I. I don't know how to pronounce it. This is the team that previously worked on Libra slash DM over at Facebook. They're raising reportedly 200 million at a $2 billion dollar valuation from FDX Ventures and others. Next one is Morpho Labs. This is a DeFi Protocol. it will take a new spin on defy liquidity pools. They've raised 18 million from Andreessen Horowitz, variant, and others. Then we have a local Miami deal. Inflection points.

They're a crypto jobs and corporate training business, co-founded by Anthony Pompliano. They raised 12.6 million from Teal Capital, Fifth Down Capital, Rose Park Advisors. They also acquired proof of talent, the crypto talent agency. Congrats to Rob and the team over there and Pompeiano and the team on the race. Inflection points, that's a cool name. I like that one. Oh, yeah.

I also liked proof of talent. That was a good name as well. Then we have Change. They're a developer of tooling that helps businesses and nonprofits except crypto donations. They raised $5 million from NIA, freestyle, and others. Next one up is Farkaster.

This is the decentralized social network platform, started by Dan Romero. They have raised $30 million in a round that was led by Andreessen Horowitz with a number of others. So congrats to Dan and team over at Farkaster. Then we've had ZKX, a derivatives trading protocol built on Starknut. They raised $4.5 million from Starkware, Alameda, and others. Next is HANG. This is an NFT-powered brand membership platform. they have raised 16 million from Paradigm and a number of other folks.

And lastly, we have Uncaged Studios, Web3 Game Developer. They raise 24 million from Griffin Gaming Partners Drive by Draft King, Sixth Man, Ventures, and others. All right, well, let's hop into some news. Let's talk about Celsius first. So Celsius has filed for Chapter 11 bankruptcy protection. This is a company that is based in New Jersey. they have disclosed that they had about $12 billion of assets in May, and right now they only have $167 million in total cash on the balance sheet. Customer withdrawals have been frozen for quite some time, I guess about three weeks at this point.

The filing was interesting. So they had a bunch of have a bunch of creditors, not surprisingly, a bunch of funds were named here. Alameda's on there, I think $12 million in change, something like that. There's a lot to get into here. I guess the first thing is let's actually just talk about this revelation that came out about a week ago. I think it was actually the day after we recorded the last podcast. We had this tweet storm by 0xB1. It turns out that that is Jason Stone.

This is a big account on Twitter. and this address, it was not known who is controlling it, but it turns out it's Jason Stone, the founder of Kifi, and it turns out that Kifai had a relationship with Celsius in which they were yield farming and just doing a lot of DGEN trading with customer funds on the Celsius platform for Celsius users, rather. So user deposits on Celsius going over to Kifai, Kifai just actively trading them, doing all sorts of DGN, DFI stuff, losing a bunch of money. I might add. And then Kifide now suing Celsius, and I don't really fully understand on what grounds here, but this is a, this is a certified mess. Yeah. There's other more impolite words

you could use to describe it, but yeah, it really is a cluster. Ever since Celsius ended, terminated withdrawals, it was probably clear this would be the outcome. There's some theories that they held off on filing for chapter 11 until they were done paying down their debts to the defense protocols yeah let's let's talk about that next i want to get your take on this key five thing though it's always fun reading the uh these lawsuits i remember zero what was it zero xb something or other uh that was zero xb one yeah it's people wondered yeah for years what who they were and why they were so active they were of the biggest yield farming addresses in all of defy i think frankly i think celsius was the biggest

contributor to liquidity on defy without a doubt kind of terrifying to think about that it was so illusory i mean i guess the deposit the client deposits were real but uh there wasn't a ton of substance there and uh it was the zero xb1 it's not entirely clear if they're how profitable their strategies were they were very active and they were kind of a famous or infamous account. And it's so weird. I mean, we talked to Kifai long before they were Celsius affiliates. Yeah, so Kifai, we heard the pitch, right?

It was an MPC custody platform that had Celsius as a customer, but that was like two years ago. And it was completely not clear that they were, I don't think that they were a trading firm at that point. No, it was all about just better tools for, I think, staking was actually part of the pitch better staking tools turns out that they pivoted into being a sub hedge fund for celsius here and um the complaint here is that celsius told them that they were hedging these strategies at the top co level which by the way is the most insane thing i've ever heard

because that's completely impossible to hedge yield farming defy strategies you actually cannot do that that's not a thing. How do you hedge these thinly traded assets which are just being issued for which markets may not exist? It's unhedgeable. It's an unhedgeable financial instrument. So that is peculiar and I don't even know what to think of that. The other thing you said, though, around them, Celsius closing out a bunch of these D5 positions. So I think this just looks like what they were doing was using customer deposits to pay off their defy loans before they filed for bankruptcy, probably because they had a view that once they entered bankruptcy, they'd have to turn over the keys to these wallets and that, you know, Alvarez and Marselle and Kirkland Ellis and all

these lawyers and restructuring consultants would have no idea how to deal with defy, both from a legal and operational perspective. They just figured the best chance to get back as much money as they could would be to, you know, take the money from one pocket, pay off the defy loans, and live to fight another day. It's funny that in the hierarchy, the defy protocols themselves end up being kind of senior. Yeah. I mean, your first allegiance is to the protocol. Yeah, I mean, you don't want to have to get liquidated here if you have another wick down

and no one at Celsius has possession of these wallets. it's, you know, I guess it's a good thing for, for defy. But yeah, you're right. I think so the defy liquidity here has just changed dramatically over the past month. It does look like Celsius, which is just a major, major contributor to defy liquidity. Yeah, the other thing. So I think the nature of defy is going to change a lot here. The defy tokens have been in a kind of extended bear market for something like 18 months now, certainly relative to Ethan. things like that. There's a lot of questions, maybe really for the first time, about what rights token holders have. You know, certainly with high profile, quote, blue chips like Uniswap,

it's just really unclear what the token holders get. You know, you've got two cap tables. You have the shadow cap table. You have the equity, and then you have the token. And I think there's going to be a lot of these fights, basically. And I think the token holders are going to be a little losing side of that. You know, if and when the SEC gets active, there's also going to be the question of, is it really kosher to juice yields or support people providing liquidity to your protocol with in-kind, the token distributions? I think basically the yield farming phenomenon is probably going to be phased out here. and you know I think that's a lot of business models in defy are going to have to be

rethought as consequence so the other thing that's going to be interesting with this bankruptcy filing it's the same thing as the Voyager bankruptcy filing is that there's a native token here and so there's the cell token in the same way that their Voyager has the VGX token and so what is the view on how that works I mean is Celsius going to come up with a restructuring plan here that says hey we're going to come out of bankruptcy and it's going to be you know you get a bunch of Celsius tokens a bunch of Celsius equity and you get you know 50% of your crypto back or something is it going to be one of these type of deals plus you have a claim on you have three arrows or whoever i mean think about the waterfall there you've got creditors various tiers uh shareholders

and then surely the most junior claimants are the token holders i mean you have to imagine they'd be a total afterthought here. Yeah, I would think so. Voyager case. You also wonder about acquisitions. I mean, surely in some acquisitions where there's equity and there's a token, the token holders, the token would just be deprecated, basically. Yeah, but I, you know, it'd still be out there.

I think there, you'd find some people trading it like GameStop style maybe, but I'm really interested to see if there's going to be a pre-packaged plan here, like Voyager, that there's actually is there a plan or is there just a hey we're going to wind this down you know they filed chapter 11 not for a full liquidation but they i wonder what's possible here yeah it's interesting that they're all filing chap 11 restructuring not liquidation you have to imagine that it's actually really a liquidation it's just kind of an optimistic filing yeah i i don't see this coming back as a as a retail platform but but who knows um you know so let's kind of talk about some of the causes here. So three arrows, Suzu and Kyle Davies.

Reports came out Friday and over the weekend that they have reportedly not been cooperating very well with the liquidators and that their whereabouts were unknown. And as far as I can tell, still unknown. It seems like they showed up on a Zoom but didn't have the video on and didn't have anything to say. Then Suu popped up on Twitter a couple days ago, basically complaining that the liquidators may have failed to exercise three arrows, Starknet token warrant, which some have speculated could be worth a couple hundred million dollars. Three arrows was an early investor there. I saw the founder of Wintermute had a funny comment, which I think is probably spot on. It's just that the only thing that Sue cares about is that he's actually a creditor on that

investment vehicle that made the investment in Starkware so he just wants his taste. He doesn't seem to really understand the gravity of the situation. I think it's safe to say that it's a good chance that the outcome is going to be really horrible for these guys. But talk about not reading

the room. And then Taneo, which is the liquidation company, they posted an FAQ actually yesterday night. One of the questions here in the FAQ is, can you describe your efforts to contact 3AC's principles.

The answer is to date, with very limited exceptions, the directors of 3AC have not voluntarily responded to request from the liquidators for information and documents. So it doesn't seem like these guys are helping at all, really. No. Yeah, it honestly doesn't surprise me that the liquidators wouldn't have, you know, had the wherewithal to exercise a warrant. for a token. They probably didn't know what it was. We don't know if they did or didn't, by the way.

This is like speculative. Just the accusation. There's probably a payment involved for the warrant. So it doesn't really shock me that they didn't. Probably worth a lot. Certainly doesn't help. Three Arrow's beleaguered creditors. But you can imagine that Starknet would make an exception.

I don't know. Yeah, this story, kind of in grim territory at this point. Yeah, this keeps on getting uglier and uglier for sure. So I'm sure we'll be talking about this every week. Speaking about folks that had exposure to three arrows, which is turning out to just be a really, really, really long list, we can add blockchain.com to that list. They have disclosed that they have about a seven or a 200,

$70 million loan loss related to three arrows. They were one of the petitioners for liquidation in the BVI. So this is coming up, actually, the first meeting of creditors in the BVI. I think it might be next week or the week after. That's going to be quite a meeting. That's going to be like a who's who of the crypto industry down there. It'll be a de facto crypto conference in the tropics. I don't think there's going to be a lot of people like getting ready to send

Christmas cards to Suzu and Kyle, that's for sure. It's incredible that it's almost every day that we find out in the name of a new lender that we'd never heard of before that was implicated in this thing. I guess it's a surefire way to get them out of the woodwork. There's one called Hoddle Not, no relation to the crypto- Twitter personality, which is, I believe, Singapore-based, which also face significant losses. It's just incredible. I mean, the list of firms that are implicated lending firms must be up to 20 at this point.

Yeah, yeah. And there's some that are not public yet and might have smaller denominations, smaller amounts. There's also a bunch of family offices that are in this thing that aren't public yet. I'm sure they'll become public at some point. They'll be on a credit. People that got drawn in, yeah, when Three Arrow's was in their death

I was looking for emergency liquidity. The one I'm curious about is Nexo. I mean, Nexo was a top three lender, maybe top one at some point. And they appear to be operating normally. So they're sort of making a lot of noises about acquisitions and things like that. I don't know anything about Nexo. It's been a really opaque company to me. Honestly, I'd never even really thought much of Nexo.

so over the years. Obviously, they do a ton of podcast advertising, so I've heard the name a lot. But it's really strange to go and hire an investment bank and say, hey, we're going to go start buying stuff and to make that public. It's just a... Yeah, I mean, it's a show of force, right? If I had to bet on, you know, of the big three lenders, which one would escape apparently unscathed, they would have not been my choice. No, I don't think so. Like, reputational. they seemed like they were taking big risks, but I mean, who knows? They haven't shown up as a creditor here.

I guess we'll find out if they are. Next up in News, Starkware, they have released a plan for the quote-unquote progressive decentralization of the Starknet network. They have confirmed that there will be a Starknet token, and they've elaborated on the design and the utility. I guess this may have been hastened by. the news that three arrows had potentially failed to exercise their warrant. Yeah, it seems like actually three arrows just totally blew up the spot here of

Starkware. I think a lot of people knew that they were doing the token, but I don't think that these guys wanted two criminals and Abu Dhabi making this announcement for them. They probably would have liked to do it over like their own blog post or podcast or something. So my conspiracy is that Three Arrows is trying to scrape together resources at the sovereign level to make their creditors whole and launch a new fund. I think you told me that that's insane. There's no way on earth that these guys could ever work in this industry again.

There's no exchange that will ever do business with these guys. There's no lending firm that would ever do business with these guys. Not to mention the fact that these guys are going to be prosecuted for the next like 15 years for all the crimes that they've committed. Well, memories are short. Unless they're going to go live on Mars and there's some colony that I don't know about, these guys have no future in financial industries. We'll see. You know, second chances sometimes come in this life. So that's like one of the theories that's out there is that they're going to get some sovereign wealth fund to like recapitalize them and just plug this $5 billion hole that they've made.

all of a sudden, if anyone, if anyone can do it. If anyone can do it, it's Kyle Davis. Let's go do a trade with Kyle and Suu, and let's have Sue on the podcast talking about the super cycle and just, that's, they don't lack the confidence to potentially pull this off, right? You just need to manifest it. Of course. I mean, they're both complete psychopaths. You have to be if you're like, you just lost five.

You just stole money. You can't call people psychopaths. This is a family-friendly podcast. I think you can keep that. I don't know. The other theory that I saw that's floating out there is that these guys, you know, are just like degenning and defy pseudonymously right now trying to like win it back. I find that a little far-fetched too, although I guess it could be possible.

I'm sure they have, we're going to find out maybe how much money they have on like hardware wallets and we'll see what the reach of these liquidators is because they'll certainly be going after their personal accounts. But I guess it's possible that they'd be trading, you know, on a no-name's basis on defy protocols right now. I think there's a lot of people in the industry that are known that also have pseudonymous accounts on crypto Twitter. They just have their parallel account

and maybe they pseudonymously work in Dows, you know, things like that under their pseudonym. I think a lot of people live double lives. I'm sure that these two guys, these two guys might be among, they might have some, some of these big anonymous Twitter accounts could be Suu or Kyle. You never know. Yeah, totally. Wouldn't surprise me.

Did you see that Plaid announced that they are going to be integrating with crypto exchanges and brokerages? That strikes me as a bigger deal than people are making that out to be. That's just a kind of a throwaway tech crunch story. But Plaid is ubiquitous in financial services and you get that working on exchanges and brokerages, I think that's a huge product. Totally. Our last piece of news here is, well, I think everybody knows this, but now inflation is 9.1 on year-year basis coming in harder than expected, highest since 1981.

The euro is selling off against the dollar aggressively. Myra Draghi just resigned. Japan is in some kind of dire straits. There appears to be a banking crisis in China. Basically, everything is hitting the fan in macro land. Yeah, Sri Lanka is falling apart. Oh, yeah. Everything's on fire out there.

I think we sometimes forget that. Things are sort of on fire in our little space, but they're also really on fire out there too. All things consider Bitcoin a 20K in this macro environment, with this amount of forced selling is actually pretty impressive. Agreed. And the quality of sentiment, which is just in the basement, I mean, I have people telling me like, hey, where's the next marginal buyer coming from? And no one has any idea. The fact that it's at 20 here with so many four sellers, yeah, in the market, it's actually

pretty remarkable. That's a optimistic way to close out. So here was an interesting thing. Circle released a blog post today. issuing a full breakdown of USC reserve assets, a complete list of USDC reserve custodians. So this is more transparency than we've ever seen. And they've actually gone as far as to release the CUSIPs associated with their treasury position. so all the way down to the literal serial codes of the securities,

and they say they're pushing to release more information to the extent they can. So from being somewhat unstransparent, you know, a year or so ago, changing the reserve composition to the least risky assets and not releasing the QSIPs, it's kind of all steps in the right direction for them. I guess this is on the back of Matt Taibi wrote this blog post this week, which I think he missed the mark on jumping into the terms of service on USDC and trying to figure out the liquidation waterfall. I think there was some confusion around like the yield product and the circle pay terms of service.

So honestly, I didn't really follow it very much. But the call is for more transparency. I think that's what we end up getting with Jeremy's blog post. Yeah. I generally like Matt Taiibi, but I think he was really wide of the mark on this one. there was kind of an air of suspicion around the whole piece, which I thought was pretty unwarranted. He seemed confused by their business model, which is very simple and straightforward. It's simply you earn interest on the underlying assets. It's a very easy formula if they holding

X amount of treasuries at times the interest rate. And they don't pass it on to USDC holders. So people willingly hold USDC. They're a little bit exposed to inflation. They don't earn interest, but, you know, they're happy to because they value the utility that having USC gives you. And that's the business model. As interest rates rise, it looks better and better. So I don't, he was a little confused about that. But yeah, of all the targets to go after, I don't know if that's the most warranted. But I think people are just looking around for the next Terra or the next three arrows. And so they're casting a wide net. Well, there's plenty of places to look for that. I think circles probably not on that list.

But there's other places Matt Taiibi could spend a lot of time in this crypto industry. But I guess, you know, some of these things are falling off the map. Celsius would have definitely been on that list. Yeah. I mean, that's right. Journalists, I remember, we're asking me, what's the next Terra? And I think the answer I'd gave them most of the time with Celsius. But I don't really have what's the next Celsius. I don't know. A lot of these things are falling off the map, which maybe is a good thing for the bottom being in. But if you were to ask me like six months ago, what are some of the things that I'm really worried about in the ecosystem? Terra would have been on the list. Celsius would have definitely been on the

list. Three arrows would not have been actually. I did not think that that was a full-blown fraud. but some of these things, some of these things hide. Yeah, that one shocked us both. But yeah, my list of things that I'm sort of really worried about, as you say, it's short because this liquidity withdrawal really exposed a lot of these inferior business models. Yeah, the tide has gone out. So I guess it's good for the overall health of the ecosystem,

the people that are building real things for the next bull run. All right, so I think that's it for the week. Always fast moving. I'm sure there'll be more to talk about next week. And we will see you then. We have an episode of dropping on Monday. So we have an exciting interview on Monday. And so two episodes next week.